Pay-TV faces hurdles in emerging markets

Ovum As with fixed broadband and telephony, penetration of pay-TV services remains comparatively low in many emerging markets. Most pay-TV operators appear stuck in a self-perpetuating cycle of servicing a limited premium customer base, while free-to-air and pirated content caters for the majority of middle and lower income consumers.
As long as service prices remain high, pay-TV will struggle to break out of its current niche role. Operators need to be bold and develop lower-end packages that will help bring about the scale required to make their pay-TV services viable.
Piracy in the form of counterfeit DVD and Blu Ray discs or the hacking of smartcard-based conditional access systems (CASs) is common in countries with below-average income levels. Online piracy is less prevalent than in advanced economies where broadband is more universally available. The MENA-based DTH operator Orbit Showtime Network (OSN) is estimated to have between 1.5 and 5 million illegitimate viewers, compared with a paying customer base of less than half a million.
From December 2010 OSN began the year-long migration of its customer base onto a new, purportedly hack-proof, CAS providing all users with new HD decoders free of charge. The aim is to eliminate smartcard piracy and force pirate users to become legitimate customers, while also upselling existing customers to its hitherto only mildly-successful HD packages.
Meanwhile a number of major pay-TV operators in the Middle East have moved from a smartcard-based CAS to closed delivery via dedicated set-top boxes. While it’s too early to gauge these new systems impact on piracy reduction and subscription growth, we expect such measures will inevitably become more widespread.
Not too distant from piracy in its capacity to stifle pay-TV development is the strong presence of a legitimate free-to-air market – something that has also affected the landscape in more advanced economies such as Germany and Spain. In Brazil, for example, a large selection of desirable content is available via analog terrestrial TV and remains under the control of a major local media conglomerate that enjoys a robust business based on the ad-supported, FTA model.
The Middle East multi-channel TV market is characterized by very high penetration of retail DTH decoders, the vast majority of which are used to access the large number of available FTA channels. So the typical emerging market’s TV landscape scenario is polarized, with a core of high-ARPU pay-TV subscribers at the top while most consumers from the middle and lower income brackets make do with a healthy FTA selection, with all segments receiving further “support” from readily available piracy options.
Income and pricing don’t always stack up
While there are now large and fast-expanding middle classes across all emerging markets, wealth distribution remains somewhat more uneven than in Europe or North America. Yet despite lower average wages in many countries, pay-TV pricing levels in many emerging markets are much closer to those in more developed economies.
As is typical with nascent and unproven services, recouping capital and operational costs by targeting the “low-hanging fruit” of early adopters and high-end customers is the favored strategy, at least in the initial phase of deployment.
In this respect, pay-TV development reflects the pattern of fixed broadband evolution in many markets, where access prices remain high relative to average incomes. As with broadband, pay-TV service providers understandably want to minimize the risk of their investment.
Pay-TV operators face a number of significant cost hurdles including content acquisition, content/service delivery, subscriber acquisition, and customer support. These cost elements can only be made viable through either high sales volumes or high ARPU. Most operations in emerging markets tend to pursue the latter option, playing it safe by targeting the smaller, higher-income segment with offers priced at levels beyond the reach of most consumers.
For example, Sky Brasil’s three cheapest channel packages cost $32 (€22.42), $45, and $57 per month respectively, while the MENA DTH operator OSN generates monthly ARPU of around $50. With insufficient scale, favorable premium content acquisition terms are hard to come by and, in markets occupied by multiple operators audience sizes are often too small to justify paying the high minimum guarantees demanded by content owners.
At the same time, the lack of volume denies operators the economies of scale for equipment, infrastructure, and SAC enjoyed by those serving larger subscriber bases. Thus retail prices look set to remain high, perpetuating the chief constraint to mass-market adoption for pay-TV services.
Satellite growth doesn’t just drive pay-TV
Direct-to-home (DTH) satellite remains the preferred distribution platform for most TV service providers in emerging markets, as it enables efficient delivery of large numbers of channels with lower network investment requirement than cable or IPTV and is a particularly attractive option in markets where wireline infrastructure is limited in reach or quality.
There is very little cable network infrastructure in the MEA region, while in Asia-Pacific coverage and digital upgrades of cable systems remain patchy. IPTV implementations remain in their infancy, particularly in MEA, South and Central America, South East Asia and the Indian subcontinent, as telcos continue to exercise caution with regard to large-scale rollouts and most services initially target only high-end consumers. While satellite delivery brings efficiencies to pay-TV distribution, it also lowers adoption barriers for free-to-air (FTA) digital TV services, and is vulnerable to piracy.
As FTA services continue to proliferate over DTH and DTT platforms, consumer’s appetite for quality multi-channel services will inevitably grow. To turn this expanding audience into a sustainable opportunity, pay-TV operators in emerging markets must strike a fine balance between continuing to service the more profitable but narrow high-end segments and developing middle and lower tier propositions that will be appealing and affordable to a much broader base of consumers.
There is plenty of scope for developing smaller-themed, segmented channel packages and targeting these at specific communities as an alternative to the enforced bundling of irrelevant content into large basic tiers that characterizes so many pay-TV offerings. In the UK BSkyB pursued this route, introducing a broad selection of basic-tier packages as a way of reaching out to a wider base of lower-value customers when its premium subscriber growth began to saturate.
Meanwhile players with multinational scale such as DirecTV and Multichoice are steadily expanding beyond their core US and South Africa markets into Latin America and Sub-Saharan Africa with differential offerings packaged and priced for local audiences.
So although overall ARPU levels will inevitably be lower than those generated by today’s predominantly high-end customer bases, building up volume towards the middle and lower end of the customer pyramid will be a crucial step towards achieving the economies of scale necessary to make pay-TV a viable mass-market proposition.

Original article: Overcoming pay-TV challenges in emerging markets